Milk prices strengthen in August

Wisconsin State Farmer

Milk prices continued to strengthen in August, but production is showing signs of acceleration.

According to the October Milk Report released by the National Milk Producers Federation, this year’s slow decline in the rate of U.S. milk production growth was interrupted in July and August, bouncing back to a 2 percent year-over-year increase.

Milk prices continued to strengthen in August, however production is showing signs of acceleration.

Lower feed costs in August helped further improve the month financially for the nation’s dairy farmers, as did a drop in the recent rates of American-type cheese production growth.

But dairy markets remain mired in a rather ho-hum mode, with low prices for nonfat dry milk, further weakness in dry whey prices, middling cheese prices that are struggling to find a sense of direction, and even some softness in typically strong butter prices as the industry heads into the holiday season.

Commercial use of dairy products

Total fluid milk consumption in the United States was 0.7 percent below a year ago during the May–July period. This was the first time since the beginning of 2017 when the moving three-month fluid milk consumption level declined by less than 1 percent below
a year earlier.

Total consumption of milkfat in all U.S. fluid milk sales was up by more than 1 percent over a year ago during the period. Domestic consumption of American-type cheese grew strongly during May–July, but domestic consumption of all other types of cheese has been lackluster for over half a year.

Growth of all dairy products continued to exceed 1 percent in terms of milkfat. Domestic consumption of all dairy products was still declining when measured on a skim solids basis. The resumption of growth in U.S. dairy ingredient exports indicates that external
markets still represent more attractive sales opportunities for U.S. skim solids.

U.S. dairy trade

Changes in U.S. exports of the major dairy product categories generated a two-fold pattern during June–August. Butter, milkfat and cheese exports showed strong growth over a year ago, after dropping significantly throughout 2016. Dry ingredient exports,
however, were all down over a year ago after generally showing positive growth for most of the past year.

The percentage of U.S. milk solids production exported during the period was down
slightly year-over-year after rising for the past year. More than one-half of both the volume of milk solids and the dollar value of dairy products imported into the United States during June–August consisted of imports of cheese and concentrated milk
proteins, i.e., MPC and casein, including caseinates.

This pattern is typical of U.S. dairy imports generally. Both of these major import categories were down over last year during June–August in terms of product volume, as they have been since last spring, resulting in a substantial drop over a year ago in the percentage of total U.S. milk solids represented by all U.S. dairy imports.

Milk production

Annual growth of the national milking cow herd has stabilized at 0.8 percent in recent months. However, the annual growth rate of U.S. milk production per cow has recently begun to increase, following eight months of declines.

This has halted the steady drop in total U.S. milk production growth over the same period and pushed that rate back up to around 2 percent per year. Expansion of milk production at that rate will make it more difficult to reduce the current significant inventories of American-type cheese and other dairy products, which is needed
to produce more robust milk and dairy product prices.

Among the largest milk producing states, Wisconsin, Minnesota, New York, Pennsylvania and Ohio have experienced accelerating growth in recent months following general moderation in their rates of milk production expansion.

Milk and feed prices

USDA’s National Agricultural Statistics Service (NASS) announced the August U.S. average all-milk price at $18.00 per hundredweight, $0.70 higher than the July national milk price. This was fully consistent with the August federal order class prices, which,
compared with a month earlier, featured a flat Class IV price, a modest increase in the Class I price and an increase of just over a dollar in the Class III price.

All three feed cost components of the Margin Protection Program (MPP) feed cost formula were down in August from July, which dropped the monthly MPP feed cost calculation by $0.49 per hundredweight and therefore raised the monthly MPP margin by $1.19 per hundredweight from July to August.

The bi-monthly MPP margin for the July–August period was $9.67 per hundredweight.
Average retail prices of dairy products reported by the U.S. Bureau of Labor Statistics showed a further drop of $0.05 a gallon in the retail price of fluid whole milk in August, marking the fifth-straight month of modest declines in the consumer price of fluid milk.

Looking ahead

The mid-October CME dairy futures indicated that the August U.S. average all-milk price would likely be close to the peak for milk prices for at least the following year. At the same time, CME futures projected moderate increases in feed costs over the same period, but not to the extent that the MPP margin would drop below $8 per hundredweight.

USDA has become more bullish in its outlook for U.S. milk production, and has raised its monthly forecast of 2017 production for the second time in October, after steadily lowering it for most of the year.

The department also raised its latest 2018 production forecast after dropping it since May. It now projects 2017 will be up by 1.9 percent over 2016, and production next year will grow by another 2.1 percent. In recent months, USDA has been generally lowering its monthly forecasts of the U.S. average all-milk price for 2017 and 2018, but both are still higher than the dairy futures markets are currently indicating.